First-time homebuyers have different programs to help them scrape together the down payment to get into a property, but that isn’t the case for first-time landlords, who typically need 20 percent or more down to get a loan.
A Chilean company has picked Denver to introduce a concept it says can overcome that hurdle.
Over the past five years, Capitalizarme has sold more than 5,400 condos throughout Chile and more recently Lima, Peru. It has launched a Denver-based subsidiary called BrickOp to replicate that model in the United States, where there are a lot more potential investors and capital.
“We are looking for affordable multi-family,” said Gabriel Cid, CEO of BrickOp. “We are looking for good buildings with good tenants.”
He acknowledges that has been a struggle in Denver, where real estate prices have skyrocketed since 2012. Developers have largely focused on luxury apartments and the few condos built, because of the state’s construction defects law, have also been high-end.
High prices make it harder for the math to pencil out, but after two years of looking, the company purchased a small 10-unit condo building called Pecos Flats near 70th Avenue and Pecos Street for its U.S. debut.
“In Chile, they have targeted millennials with higher incomes,” said Alfonso Silva, a partner in Silva-Markham, a Denver-based property manager. “This is mostly for the younger investor who wants to start investing in real estate and has disposable income, but who struggles to get the down payment.”
Breaking into real estate investing can be a challenge for those without deep pockets, especially in expensive markets like metro Denver, where the median price of a home sold in April was $460,000 and the median price of a condo was $305,000.
While lenders have loosened up standards for first-time homebuyers, including reviving zero down mortgages, buying a rental property still requires a good chunk of money down.
Silva, a Chilean immigrant who has invested in BrickOp, said the concept is different then crowdsourcing, where a bunch of investors put up smaller amounts of money to get a fractional share of a property. Owners receive full title.
Cid said his company is offering another alternative for those who haven’t built up savings but have extra cash flow and don’t necessarily want to invest the time and energy into mastering real estate investing.
They can earn a much higher return than parking money in a bank account or even a mutual fund, without the hassle of being a hands-on landlord.
“This is for the average person,” he said.
How it works
To acquire a unit, an investor commits 5 percent of the price, locking in a value. He or she then covers the rest of the down payment across the next 30 months or a time frame they can manage. Once the 20 percent is covered, the investor takes out a mortgage.
While the down payment is being made, BrickOp collects the rents and is responsible for repairs, including a refurbishment once the tenant moves out. The investor is provided with a freshened up unit, a tenant and a property manager who collects the rents and handles maintenance issue.
Monthly rents are enough to cover all the normal expenses, although Cid recommends the extra amount be kept in reserve to handle repairs and vacancies.
Pecos Flats condos cost $210,000 to $240,000 for a two-story, two-bedroom unit with mountain views. Reserving that unit requires $12,000, followed by another 30 monthly payments of $1,200. When the 20 percent down is reached, the buyer takes out a mortgage, either through BrickOp’s local lending partner, FirstBank Colorado, or through a different lender.
Silva-Markham is managing the units for a 4 percent fee, below the typical cut of 8 to 12 percent that property managers take.
Cid estimates that after insurance, taxes, mortgage payments, and HOA fees, the investor should clear between $100 or $200 a month. As with any investment, there are no guarantees. Rents could go down, vacancies could shoot up, tenants could damage the unit.
Based on recent rates of appreciation, an investor could double their initial investment in about eight years, Silva said. Using more conservative assumptions, the cash-on-cash return will beat most alternatives out there.
“We want to make sure we are buying something where the finances and expenses will be covered by the rent. We need to be very sure of that possibility,” he said.
For a young investor willing to hold for the long haul, that initial capital investment could provide a nice stream of income into retirement after the mortgage is paid off.
Caution urged
BrickOp is taking a new approach to address an old problem, coming up with the down payment for a rental property. But as with any new approach, proceed with caution, advised Teo Nicolais, a real estate instructor at the Harvard Extension School.
Nicolais, who also invests in real estate, helps his students tear apart deals to figure out how they work and if they are worth pursuing. He went under the hood to examine the numbers at Pecos Flats.
BrickOp describes the monthly payments as something similar to a layaway plan to build up the 20 percent down payment. But Nicolais considers those 30 months as a period of negative cash flow, a deadly sin in real estate investing. A lot can go wrong in that grey zone.
He is also concerned about the lack of cash left over after paying the mortgage and other expenses. The margin of error is around $137 a month on the most expensive unit. It’s an extreme case, but he has had tenants do $5,000 or more in damage on their way out.
“They are making very aggressive assumptions,” Nicolais said of the expenses, which typically run 30 percent to 40 percent, before the mortgage. BrickOp is estimating them at 10 percent, he said.
For example, the HOA fee at Pecos Plat is only $30 a month, which is unusually low, he said. For a two-bedroom unit he owns in Lakewood, he pays $230. When the new owners take over the association, they may find themselves without enough reserves to handle really big expenses like repaving the parking lot or replacing the roof.
While investors may chafe, there are good reasons why banks require 20 percent or more down on rental properties, Nicolais said. And there are creative ways to get there.
Bigger Pockets, a real estate investing forum based in Denver, offers newbie investors tips on extreme frugality to save up enough for a property purchase, as well as tips on house hacking, where a buyer brings in renters to help cover the mortgage on a home they will live in.
And if someone is really serious about investing in real estate, they would do well to invest the time and effort to learn the ropes, he said. Those who want to be passive should invest in a real estate investment trust.
Cid said the model tries to make real estate investing more accessible, allowing people who would otherwise watch from the sidelines a chance to take advantage of the power of leverage. And to get that leverage, it helps them meet the down payment over time. The motivation to save becomes much greater when they have signed on the line.
Silva adds that BrickOp is also taking a conservative approach by focusing on more affordable properties in blue-collar areas. When the downturn comes, those properties with lower rents are much more likely to stay full than the luxury apartments dependent on high-wage earners.
Path to conversion
One question that BrickOp’s entry into the market raises is whether it could represent a way to fund the conversion of apartments to condos, something observers say needs to happen to fill a gaping hole in the metro Denver housing market.
Pecos Flats was a rare find in metro Denver, a block of condos rented out like apartments, with commercial space attached. BrickOp is actively looking for more opportunities, not to mention more large investors to help it make those buys, Cid said.
One route is to buy older apartments, but even they have gotten expensive. Gelt Inc. recently purchased the 384-unit Cedar Run Apartments in Denver, built in 1969, for $62 million, or $161,458 a door. Five years earlier, it had sold for $38 million or $100,000 a door, according to Trepp.
If BrickOp can’t make condo conversions pencil out, it may have to try to build affordable condos from scratch, a different twist on a build-to-rent model.
“We are in conversation with builders: Can you build with us in a cost-effective way?” Silva said.
A lack of a more affordable housing product in Denver not only has served as a barrier for renters looking to own, but also savers who want to invest in local real estate.
Because of concerns over construction defects law, most newer apartment buildings this decade carry a clause that prohibits them from being converted into condos.
Older buildings with 40 or fewer units are more likely candidates for conversion, said Ron Throupe, an associate professor at the University of Denver’s Burns School of Real Estate and Construction Management.
Why 40? That is a manageable number when it comes to selling a condo project in a reasonable amount of time, usually a year or less. Trying to clear a large project takes more time and ties up capital.
Silva said the money backing BrickOp is patient. If it can sell units, the company will sell them. If the company has to rent them out, it will rent them out. Cid adds the model has proven a hit in Chile, and he thinks it will be one in the U.S. as well, once people learn about it.
